Yahoo Finance Gildan Activewear Inc. (NYSE:GIL) Q1 2024 Earnings Call Transcript
Gildan Activewear Inc. (NYSE:GIL) Q1 2024 Earnings Call Transcript May 1, 2024
Gildan Activewear Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by and welcome to the Q1 2024 Gildan Activewear Earnings Conference Call. After the presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jessy Hayem, Vice President, Head of Investor Relations. Please go ahead.
Jessy Hayem: Thank you; good afternoon, everyone. Earlier we issued a press release announcing our results for the first quarter of 2024, along with our interim shareholder report containing management's discussion and analysis, as well as consolidated financial statements. These documents are expected to be filed with the Canadian Securities and Regulatory Authorities and the US. Securities Commission today, and they'll also be available on our corporate website. Joining me on the call today are Vince Tyra, President and CEO of Gildan; Rhod Harries, our Executive Vice President and Chief Financial and Administrative Officer and Chuck Ward, President, Sales, Marketing and Distribution. This afternoon, we'll take you through the results for the quarter and a question-and-answer session will follow.
Before we begin, please take note that certain statements included in this conference call may constitute forward-looking statements, which involve unknown and known risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the US. Securities and Exchange Commission, and Canadian securities regulatory authorities. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable IFRS measures are provided in today's earnings release as well as our MD&A. And now I'll turn it over to Vince.
Vince Tyra: Thanks, Jessy, and good afternoon, everyone. This quarter, I saw firsthand the hard work and dedication of our teams as we delivered on our goals and demonstrated resilience as a company. Our first quarter performance was in-line with our expectations, with several bright spots including continued market momentum and ring-spun and fleece products. We saw good momentum in activewear overall, which was offset by some softness in hosiery and underwear, but this was expected, and to a certain extent, we had to a broader market weakness. So I'm pleased with our competitive position and the team's execution, which drove significant year-over-year improvement in our key financial metrics. We met our top-line expectations, maintained solid margins and a healthy balance sheet, all a testament to our strong business model.
Some of you joined us on April 15 when I shared key elements of my vision for the future, which will enable us to embark on a new chapter of sustainable growth, driving strong free cash flow generation, and shareholder returns. So, before diving into the details of our first quarter results, allow me to summarize these elements on which we are now laser-focused. One, we will continue to focus on our supply chain excellence and on driving successful execution of our investments in Bangladesh, while remaining true to our back-to-basics principles and our commitment to innovation and ESG. Two, we have a renewed focus on our brands and on enhancing our commercial capabilities to deliver the best offering to our customers across the board. Three, we are increasing our emphasis on serving our retail partners and becoming the supplier of choice.
Four, we will apply a focused, be-local approach from product to pricing to supply chain to regain and gain share in targeted international markets. And lastly, we will make people and their development a priority, ensuring that the next generation of leaders has space and support to grow to their full potential. So, bottom-line, our key focus priorities are clear. We are off to a good start to the year. I look forward to taking your questions a little later during the Q&A session, and with that, I will turn it over to Rhod.
Rhodri Harries: Thank you, Vince. And thank you all for joining us today to discuss our first quarter results. The quarter unfolded largely as we anticipated, with sales of $696 million down 1% in-line with guidance provided on April 15. Activewear sales were up 1% versus last year, offset by a 10% decline in the hosiery and underwear category, which was expected and which I'll address later. Total shipments, all categories combined, were stable compared to the previous year, slightly exceeding our initial expectations. The year-over-year decline in consolidated net sales can largely be attributed to both lower net selling prices, as we drove market share gains in certain areas, and unfavorable mix due to the ongoing impact of trade-down within certain categories.
Importantly, though, we delivered an operating margin within our target range and in-line with our guidance, as we lapped peak cotton costs and reaped the benefits of lower manufacturing costs. And this drove a strong double-digit increase in adjusted earnings growth for the quarter. So all in all, we were pleased with our performance, and as Vince mentioned, we are off to a good start to the year, allowing us to reaffirm our outlook and guidance for 2024. So now let's turn to the specifics of the quarter. Active sales of $592 million were up 1%, driven by higher shipments, reflecting positive POS trends both in North America and international markets, and continued strength in key product categories, namely fleece and ring-spun t-shirts, where we believe we are gaining share.
We also benefited from seasonal replenishment at distributors, which came in slightly below last year's level, as expected. Our national accounts, who service retail markets, also showed strong momentum, as we continue to gain share in this channel as well, partly offsetting the active-wear volume growth, where lower net selling prices, as we opportunistically implemented price actions in select channels, where we are seeing direct flow-through to share. This said, from an overall pricing perspective for the full year, it is important to note that we continue to expect relatively good price stability as we move through 2024. Volume growth was also offset by unfavorable product mix relative to the prior year, due to the ongoing impact of trade-down within certain categories, as noted earlier.
Finally, international sales were up 1%, reflecting a potential stabilization in POS trends, with noticeable signs of recovery in some of our regions. Turning to the hosiery and underwear category, sales were down 10% versus the prior year, reflecting unfavorable mix within this category, the phase-out of the under-armor business, with the expiry of the license on March 31, as previously communicated, and broader industry weakness in the underwear category. Moving on to margins for the quarter, both gross and adjusted gross margins saw significant improvement, up 360 and 410 basis points year-over-year, respectively. Our adjusted gross margin reached 30.3%, which was primarily driven by lower raw material and manufacturing input costs, slightly offset by the impact of lower net selling prices and unfavorable mix, as noted earlier.
With respect to SG&A, expenses were $105 million, or 15.1% of sales, including charges pertaining to advisory fees on shareholder matters, costs related to assessing external interest in acquiring the company, adjustments to CEO separation costs, as well as special retention awards, all totaling $20 million. Excluding these charges, adjusted SG&A expenses as a percentage of sales were up 70 basis points to 12.3%, mainly reflecting various non-recurring expenses, and to a lesser extent, sales deleverage. Even though it was a smaller quarter, 12.3% is definitely higher than we like, and looking ahead, we expect SG&A as a percentage of sales to return closer to 10% for the remainder of the year. Putting these elements together, we generated an operating margin of 15.1% down from 18.2% in the comparable period in 2023, which included a $25 million gain from the sale and leaseback of one of our US distribution facilities.
On an adjusted basis, our operating margin was 18%, up 340 basis points over last year, at the low end of our target range of 18%-20%, and in-line with the guidance we communicated. Further, after reflecting net financial expenses of $23 million, and factoring in the positive benefit of a lower outstanding share base, we reported GAAP diluted EPS of $0.47, down 13%. However, adjusting for the previously detailed charges, EPS was $0.59, up a strong 31% year-over-year. Turning to cash flow and balance sheet items, cash flow used in operating activities totaled $27 million, and we consumed $71 million of free cash flow in the quarter, which was a significant improvement over the $202 million free cash flow consumed in 2023. This was driven by lower working capital investments and lower CapEx, which last year reflected the investments made in our new large-scale manufacturing complex in Bangladesh.
On this note, we are pleased to share that the ramp-up of our Bangladesh facility is progressing as planned, and we continue to expect that we will reach 75% exit capacity at the end of 2024, enabling us to further reduce costs, diversify our supply base, and providing us with another valuable key foothold from which to serve our global markets. Finally, capital return to shareholders from share repurchases was $57 million during the quarter, and we ended with net debt of $1.1 billion and a net debt leverage ratio of 1.6 times well within our targeted levels. Turning to our outlook, we continue to feel cautiously optimistic about the industry landscape for the remainder of 2024. We are mindful of the general concerns over a softening and more value-focused consumer, and potentially moderating consumer spending.
Nonetheless, we believe our industry continues to benefit from some recovery and the ongoing shift of wallet share towards experiences, events, and travel. As such, we believe we remain well-positioned to meet the 2024 targets that we laid out in February and that were recently reconfirmed at our investor update on April 15. Recapping for 2024, we expect the following. Revenue growth for the full year to be flat to up low single digits, with the notable callout that excluding the impact of the Under Armour License Agreement expiry, 2024 full-year revenue growth would be in the low to mid-single-digit range. We also expect adjusted operating margin to be slightly above the high end of our 18-20% target range for 2024. This assumes that certain refundable tax credits will be introduced in one of the jurisdictions in which we operate, which will reduce our SG&A in 2024.
We expect CapEx to come in at approximately 5% of sales. We expect adjusted diluted EPS in the range of $292 to $307, up between 13.5% and 19.5% year-over-year. And we expect free cash flow to be above 2023 levels, driven by increased profitability, lower working capital investments, and lower capital expenditures than in 2023. Given our expected strong free cash flow and our recently revised target debt leverage ratio of 1.5 to two times, tightened from previously one to two times, the company currently plans, absent any further corporate developments, to resume share repurchases following the annual general meeting of shareholders on May 28, 2024. Furthermore, assumptions underpinning our outlook are essentially the same as we had previously communicated.
In this regard, we continue to assume that the Global Minimum Tax, or GMT, legislation in Canada and Barbados will be enacted during 2024, retroactive to January 1, 2024, and have incorporated its impact on our effective tax rate. Finally, we have also provided guidance for our second quarter, with net sales expected to be flat to up low single digits year over year. An adjusted operating margin is expected to come in above the high end of our 18% to 20% target range for 2024, including the cumulative positive benefit of expected refundable tax credits mentioned earlier. Correspondingly, we have also assumed that the GMT will be enacted in the second quarter of 2024, although we recognize that this could occur later in the year. So that's all I wanted to cover from a financial perspective, and with that, I will turn it back over to Vince.
Vince Tyra: Thanks, Rhod. And to wrap up, let me reiterate that our team remains focused on executing our enhanced GST strategy and leveraging our solid foundation as we work towards executing on the five priorities I have identified and achieving the near and medium-term targets as outlined during the investor update on April 15. Our foundation is solid, and this, together with our strong balance sheet, is an enviable position to be in, and I'm excited about our ability to drive shareholder value into the future. And now I will turn it over to Jessy.
Jessy Hayem: Thank you, Vince. This concludes our prepared remarks, and now we'll begin taking your questions. Before moving to the Q&A session, I'd like to remind you to limit your questions to two, and we'll circle back for a second round if time permits. Operator, you may begin the Q&A session.
Operator: Thank you. [Operator instructions]. Your first question comes from the line of Paul Lejuez with Citigroup. Your line is open.
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